Monday, December 31, 2018

The story of the 21st century is debt is soaring while earned income is stagnating for the bottom 95%.

Best wishes to all my readers and correspondents for a safe, healthy and productive 2019. Thank you, longstanding supporters, for renewing your financial support at the new year without any pathetic begging on my part. (The pathetic begging will commence shortly.)

While I don't have any predictions for 2019 (why look any dumber than I have to?), I do have a couple of thoughts on the economy, markets, globalization, etc. Here are a few of the key issues confronting humanity:

1. The war being waged by Corporate Power (Globalization / Open Borders) to eradicate democracy and the power of nation-states to control their own destiny. Democracy ceases to exist in a corporate-controlled globalized system of governance; the sole structure that enables a citizen to have political and economic agency is the nation-state.

Try voting for a U.N. resolution or E.U. regulation. Sorry, pal, there are no elections or representation of the rabble in globalized governance. Globalization destroys democracy and the agency of the citizenry. That's its goal.

Global corporations seek to destroy any and all barriers to their power and profits, and globalization / tax havens / Open Borders are the means to co-opt, marginalize and neuter nation-states and the political and economic agency of the citizenry. The net result of Corporate Power controlling the machinery of governance is neofeudalism.

2. Energy and capital flows. The status quo holds that energy flows don't matter very much because energy represents a shrinking percentage of economic activity. In other words, capital is what matters, not energy, because capital can always buy whatever it wants.

Try pushing your car or truck uphill for a mile. How many humans would you need to push your 3,000 pound "compact" vehicle up a slight incline for a mile or two? How about 20 miles, or 100 miles?

Take away liquid fuels and the global economy grinds to a halt, and capital loses its scarcity and value. So-called renewable energy is around 3% of total global energy consumption.

3. Volatility, liquidity and price discovery. Central banks have labored diligently for the past decade to eradicate volatility and price discovery while providing almost unlimited liquidity.

For a variety of reasons (including the political blowback of the 90% who have been stripmined by central bank policies, corporate cartels, taxation and globalization), central banks are now attempting to "normalize" by reducing or withdrawing their distorting, perverse-incentives policies.

As a result, what they've suppressed--price discovery and volatility--have erupted. What they've pimped--liquidity--is sagging.

As I explained last month, capital gets skittish when certainty evaporates. When big blocks of assets hit the market, liquidity dries up due to the mismatch between sellers trying to unload hundreds of billions of dollars of assets and the few buyers willing to nibble on a couple of billion dollars of these assets.

Central banks can fill the mismatch by becoming buyers of last resort, but the political leeway to engage in this sort of manipulation is evaporating along with liquidity.

4. 2018-19 is not a repeat of 2008-09. While many have observed the similarity of the stock market meltdown in 2008 and 2018, the fundamentals are not as close a match. There is no analog to subprime mortgages this time around. That doesn't mean there won't be turmoil and asymmetries, but it does suggest we shouldn't put too much weight on expectations that 2019 will follow the template of 2009. I'll have more to say on this soon.

5. The predictably outsized returns on capital have ended. There's more on this in The Crisis of Capital.

6. Debt and stagnant income. Rising debt is supposed to be matched by rising income to service the debt, but the story of the 21st century is debt is soaring while earned income is stagnating for the bottom 95%. That asymmetry eventually matters, for example, when zombie corporations finally default and marginal household borrowers default. The losses can't be socialized this time around; the stripmined masses have finally awakened to the skims and scams of central states and banks.

7. The much-desired de-dollarization of the global economy has yet to materialize. Personally, I believe a profusion of competing currencies in a transparent, open market is the ideal arrangement, but here's the current arrangement: the USD and euro are dominant.

8. Global harvests of grain and other essential food commodities have been good. Our luck may run out in the years ahead.

9. Cultural Revolutions are becoming more extreme and divisive. I'll have more to say on this soon.

10. The topics covered here in December are key issues in 2019: in case you missed these:

Sunday, December 30, 2018

These three dynamics render capital increasingly vulnerable to catastrophic losses as backstops and distorted markets fail.

The undeniable reality of the 21st century economy is that capital has gained while labor has stagnated. While various critics quibbled about his methodology, Thomas Piketty's core finding--that capital expanded faster than GDP and wages/salaries (i.e. earned income from labor)--is visible in these charts.

Real wages have gone nowhere for decades. Only the top 5% of wage earners have outpaced inflation's erosion of the purchasing power of their earnings.

Household net worth has soared $60 trillion while GDP expanded by $9 trillion.Compare the relative growth trajectories of the economy and net worth of assets. Clearly, capital has expanded at rates far above the expansion rate of the economy.

Assets (capital) have exploded higher while real-world inflation (including wages) has remained in line with GDP growth: modest at best.

While labor / earned income is clearly in a systemic crisis, so too is capital, though it may seem as if capital is far from danger.

Capital's crisis has several sources. One is the financial system, from pension funds to passive index-fund investors to hedge funds to government tax revenue projections, has become dependent on outsized capital gains for its stability.

Any extended period of low growth rates for capital or--perish the thought, sustained losses-- will destabilize every financial structure that is counting on a projection of current returns far into the future.

A second crisis is brewing as central bank-goosed risk-on assets become too risky to hold.Risk-on assets include stocks, high-yield bonds, real estate and leveraged derivatives such as futures. Over the past decade, central banks effectively pushed capital into these risk assets by reducing the return on safe havens such as government bonds to near-zero.

To qualm capital's fears of the risks embedded in such asset classes, central banks established a floor under these assets, the so-called Fed put: should these assets start declining, central banks implicitly promised to open the flood gates of liquidity and start buying these assets directly to shore up markets and restart the upward ascent of valuations.

Now that central banks are reducing this implicit backstop, capital is naturally becoming wary of being trapped in illiquid markets (i.e. markets where bids disappear and positions cannot be sold as buyers have vanished) and Bear Markets in which risk-on assets lose value despite the occasional sharp rally.

The third crisis is malinvestment and low returns on long-term investments: by favoring short-term gains in risk-on assets, central bank policies have created perverse incentives to buy empty commercial buildings and flats and borrow stupendous sums to fund stock buy-backs--completely unproductive uses of capital that generate zero gains in productivity, which is the ultimate source of "wealth" and widespread prosperity.

Put another way: instead of seeking moderate gains via long-term investments in new materials, new industrial processes and new efficiencies, capital has been "trained" (incentivized) to flow into speculative markets for quick gains, or into markets backstopped by central banks, rather than into productive investments that benefit the economy and citizenry.

In other words, capital should be a key source of gains in productivity that benefit everyone. Trained to seek outsized returns in backstopped (i.e. distorted) markets stripped of price discovery and quasi-monopolies defended by central states, capital has lost the appetite and the knowledge base needed to pursue long-term productive investments.

Together, these three dynamics render capital increasingly vulnerable to catastrophic losses as backstops and distorted markets fail and productive investments go begging because they can't promise the outsized returns from speculation capital has come to expect as its birthright.

Thursday, December 27, 2018

While wages have supposedly gone up 3.4% in 2018, taxes and fees are rising at much higher rates.

Here's a list of tax and fee increases hitting residents of one of the counties I call home; the list includes taxes/fees raised in 2017 and 2018:

1. Property taxes: between 6.5% and 10%, depending on the property class

2. Gasoline tax (county), from 8.8 cents to 23 cents, phased in over 3 years

3. General excise tax, up 6.3%

4. Garbage fee (commercial): up 27%

5. Sewer fees: up 44%

6. Electricity (base rate): up 7.4%

7. Annual vehicle safety inspection fee (state): up $5.81

8. County water service: up 8%

9. Accommodation fee (a.k.a. hotel tax) (state): up 10%

I may have missed a few, but you get the idea: while wages have supposedly gone up 3.4% in 2018, taxes and fees are rising at much higher rates. (Given that the Consumer Price Index underweights increases in big-ticket costs such as healthcare and college, the 3.4% gain is suspect; those households exposed to giant leaps in expenses likely lost ground).

I understand local governments are caught in a vise: wages and benefits to their employees make up the majority of their expenses, and those costs are mandated by union contracts and/or state-level agreements.

Many local governments cut services in the Great Recession rather than raise fees and taxes, and so now that the economy has "recovered," they're rushing to raise revenues to restore services or deal with the backlog of projects set aside during the lean years.

But none of that makes it easier for households and enterprises getting hit by fast-rising fees and taxes. The above list is just the tip of the iceberg: how much does a simple parking ticket cost you now? In many locales, what once cost $15 is now north of $60.

How about the cost for a copy of an official document at the County Records office? In many locales, what was once a nominal fee is no longer nominal.

We all know public pensions are often underfunded, or dependent on outsized stock market gains, which means the increases in local government taxes and fees are just getting started.

Wednesday, December 26, 2018

As we look ahead to 2019, what can we be certain of? Maybe your list is long, but mine has only one item: certainty is fraying.

Confidence in financial policies intended to eliminate recessions is fraying, confidence in political processes that are supposed to actually solve problems rather than make them worse is fraying, confidence in the objectivity of the corporate media is fraying, and confidence in society's ability to maintain any sort of level playing field is fraying.

When certainty frays, capital gets skittish. Predicting increased volatility is an easy call in this context, as capital will not want to stick around to see how the movie ends if things start unraveling. The move out of stocks into government bonds is indicative of how capital responds to uncertainty.

The coordinated efforts of global central banks to backstop and boost markets also backstopped confidence in the banks' monetary policies. Regardless of the long-term impact of the policies of quantitative easing and repression of interest rates, capital could count on the policies remaining in force and act accordingly.

With the Federal Reserve apparently ending the Fed Put and normalizing interest rates after a decade of near-zero rates, certainty about global central bank policies and the impacts of those policies has dissipated.

With valuations at historic highs and real estate rolling over, confidence that gains are essentially permanent is also fading. Buying at the top and holding onto the asset as it loses value is a predictable way to destroy capital, and so capital's willingness to exit is rising, as is its preference for deep, liquid markets such as U.S. Treasury bonds, markets where big chunks of capital can be safely parked until clarity and confidence return.

But clarity and confidence might become scarce for an extended period of time. Capital will remain skittish until there is some clarity and confidence, not just in official policies but in the political and financial contexts of those policies.

This generates a self-reinforcing feedback loop: capital seeks safety and gains, and seeks to avoid catastrophic losses. As markets become more volatile, capital becomes increasingly skittish and risk-averse. This generates the very volatility that is making capital skittish.

The net result is capital is impaired in eras of uncertainty. Uncertainty also leads to polarization, as people cling with irrational certainty to ideologies and policies that are failing.

Monday, December 24, 2018

A more humane, sustainable world lies just beyond the edge of the Status Quo.

Readers often ask me to post something hopeful, and I understand why: doom-and-gloom gets tiresome. Human beings need hope just as they need oxygen, and the destruction of the Status Quo via over-reach and internal contradictions doesn't leave much to be happy about.

The most hopeful thing in my mind is that the Status Quo is devolving from its internal contradictions and excesses. It is a perverse, intensely destructive system with powerful incentives for predation, exploitation, fraud and complicity.

A more humane, sustainable world lies just beyond the edge of the Status Quo.

I know many smart, well-informed people expect the worst once the Status Quo (the Savior State and its corporatocracy partners) devolves, and there is abundant evidence of the ugliness of human nature under duress.

But we should temper this Id ugliness with the stronger impulses of community and compassion. If greed and rapaciousness were the dominant forces within human nature, then the species would have either died out at its own hand or been limited to small savage populations kept in check by the predation of neighboring groups, none of which could expand much because inner conflict would limit their ability to grow.

The remarkable success of humanity as a species is not simply the result of a big brain, opposable thumbs, year-round sex or even language; it is ultimately the result of social and cultural associations that act as a "network" for storing knowledge and relationships-- what we call intellectual and social capital.

to an explanation of how community and self-reliance have atrophied under the relentless expansion of the Corporate-State autocracy.

The social capital and "return on investment" earned from investing time and energy in community and other social networks has been replaced by a check from the Central State--a transfer payment that surely beats the troublesome work of investing in community in terms of risk and return.

The net result of the Savior State dominating society and the economy is the rise of a pathological mindset of entitlement and resentment--the two are simply two sides of the same coin. You cannot separate them.

Once self-reliance has been lost, so too has self-confidence been lost, and the Savior State dependent--individual and corporation alike--soon distrusts their ability to function in an open market.

This is a truly sad, self-destructive state of affairs, and deeply, tragically ironic. The calls for "help" quickly lead to dependence on the Savior State, and that dependence quickly breeds complicity and silence in the face of repression and predation by the State and its corporate partners.

In a very real sense, citizens relinquish their citizenship along with their self-reliance and self-worth once they accept dependence on the State. Citizenship in the original Greek concept was not simply the granting of rights to do as one pleased; it also demanded a commitment to serve the interests of the many via personal sacrifice.

I often mention that the U.S. has much to learn from so-called Third World countries that are poorer in resources and credit. In many of these countries, the government is the police, the school and the infrastructure of roadways and energy. Many of these countries are systemically corrupt, and the State is the engine and enforcer of corruption.

Rather than something to be embraced and lobbied, involvement with the State is something to be avoided as a risk. As a result, people depend on their social capital and community for sustenance, support, work and connections.

This is not altruism, it is mutually beneficial.

Once a community dissolves into atomized individuals who each get a payment from the Central State, then they no longer need each other. Rather, other dependents on the State are viewed as competitors for the State's resources.

These atomized, isolated individuals have a perverse relationship with the State and what remains of the community around them: lacking the self-worth earned from work or engagement/investment in a community, then their only outlet for self-identity is consumption: what they wear, eat, drink, etc. as consumers. This lack of purpose and meaning is destructive to well-being; we all want to be needed and valued by our circle and society.

This dependence on the State also serves the State's goal, which is a passive, compliant populace of dependents, and distracted, passive workers who enrich the owners of corporations with their labor and pay their taxes to the state. This dependence on the State and a hollow consumerism are ontologically bound: each feeds the other.

The era of debt-based consumption as the engine of "growth" and "prosperity" is coming to an end. Adding debt no longer creates growth; it actually takes away from the economy by expanding debt service (interest payments).

The vast majority of developed-world people have had the basics of life since the late 1960s -- transport, food, shelter and utilities. The "growth" since then depended on cheap, abundant oil and a consumerist mentality in which one constantly re-defines and renews one's identity not from social investments in the shared community but from consumption of corporate goods and services funded by credit.

Not coincidentally, this dominance of consumption as the only metric for "growth" (as opposed to, say, productive activity) has been paralleled by the dominance of the Central State.

The end of credit-based consumption will be a very positive development, as will the devolution of the Savior State. The Savior State is like cheap oil--both are at their peaks and are starting their inevitable slide down the S-curve. The world they created was not as positive for human fulfillment and happiness as we have been told.

Indeed, study after study has found that people with the basics for life, a higher purpose that requires sacrifice and a tight-knit community are far and away happier than isolated, atomized, insecure consumers, regardless of their wealth and consumption.

This potential to re-humanize our economy and society is why I am hopeful.

Thank you, readers, correspondents, patrons and contributors for the wealth of ideas, encouragement and financial support you have bestowed on me over the past 13 years. My goal in 2019 is to offer content and capital that's worthy of your support of Of Two Minds.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:

Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Adsense and Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative)If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.

Our Commission Policy:

Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

Weekly Musings Reports

"What makes you a channel worth paying for? It's actually pretty simple - you possess a clarity of thought that most of us can only dream of, and a perspective that allows you to focus on the truth with laser-like precision." Jim S.

The "unsubscribe" link is for when you find the usual drivel here insufferable.

Contribute via PayPal

Why I gratefully accept donations and why you might want to donate:

A 95-minute movie with 10 minutes of ads and a small popcorn costs $25.
If you enjoyed this site for at least 2 hours this year, and you donate $25, you already received more entertainment than you did from the movie. The other 100+ hours of enjoyment you receive here is FREE.

Subscribers and donors of $50 or more this year will receive exclusive weekly Musings Reports.

You have the immense moral satisfaction of aiding a poor dumb writer who seeks to inform, entertain and amuse you.

Contribute via Dwolla

Dwolla members can now subscribe to the weekly Musings Reports with a one-time
$50 payment; please email me,
as Dwolla does not provide me with your email: